Deck 14: Introduction to Corporate Financing and Governance

Question 1

Any capital surplus shown by a firm on its balance sheet results from:

A)Not paying out all net income as dividends
B)Repurchasing shares for treasury stock
C)Issuing stock at a price higher than par value
D)Retained earnings

Answer 1

Issuing stock at a price higher than par value

Question 2

When corporations default on their debt:

A)Bondholders may receive the firm's assets
B)Bondholders will suffer a loss
C)The Board of Directors is liable for the payments
D)The corporation is forced to default on its stock also

Answer 2

Bondholders may receive the firm's assets

Question 3

If a corporation uses cumulative voting, then ______ of a shareholder's vote's _____ be cast for one candidate.

A)Some; must
B)None; can
C)All; can
D)All; must

Answer 3

All; can

Question 4

Long-term debt refers to those liabilities that:

A)Have established a sinking fund for repayment
B)Are not callable at the option of the firm
C)Are secured by specific collateral
D)Have a maturity of more than one year remaining

Question 5

What type of voting does a corporation have if there are two directors to elect and Director Jones received 50 votes from a shareholder who owns 100 shares?

A)Majority voting
B)Cumulative voting
C)Supermajority voting
D)Cannot tell voting type from given information.

Question 6

What is the book value per share of equity for a firm with $1 million in net common equity, $50,000 in authorized share capital, 25,000 shares issued, and 20,000 shares outstanding?

A)$38.00
B)$40.00
C)$47.50
D)$50.00

Question 7

Which of the following would be considered a Eurodollar deposit?

A)Dollars deposited in a U.S.bank
B)Yen deposited in a European bank
C)Dollars deposited in a Japanese bank
D)Marks deposited in a German bank

Question 8

What tax liability is created by a Canadian corporation in the 35% tax bracket that receives $50,000 in preferred stock dividends?

A)$0
B)$5,250
C)$12,250
D)$17,500

Question 9

Which of the following statements about floating-rate preferred stock is correct?

A)Its dividends increase as interest rates increase
B)Its market price increases at a set rate annually
C)It is the only stock issued without a par value
D)Its dividends are deductible for tax purposes by the paying corporation

Question 10

The purpose of a sinking fund is to:

A)Reduce the par value of stock over time
B)Take advantage of the tax break on preferred stock
C)Periodically retire debt prior to final maturity
D)Allow risky corporations to avoid bankruptcy

Question 11

A corporation's net worth is composed of the:

A)Book value of common equity
B)Par value plus additional paid-in capital
C)Retained earnings less treasury stock
D)Book value of common equity plus preferred stock

Question 12

Which of the following equity concepts would you expect to be least important to a financial analyst?

A)Par value per share
B)Additional paid-in capital
C)Retained earnings
D)Net common equity

Question 13

Which of the following forms of debt would be likely to offer debt holders the lowest interest rate?

A)Secured debt that is not callable
B)Secured debt with a sinking fund
C)Subordinated debt that is callable
D)Subordinated debt with a sinking fund

Question 14

Additional paid-in capital refers to:

A)A firm's retained earnings
B)A firm's treasury stock
C)The difference between the issue price and the par value
D)Funds borrowed from a bank or bondholders

Question 15

ABC Corporation has fallen upon hard times and dividends on their non-cumulative, preferred stock have not been paid for three years.Which of the following is true?

A)Common shareholders must now receive three years' worth of dividends
B)Preferred shareholders must now receive three years' worth of dividends
C)The corporation must fold if preferred shareholders are not paid
D)Common shareholders have not received dividends for three years

Question 16

How much will be recorded as a firm's additional paid-in capital if it issues 1 million shares that have a $5 par value for $15 per share?

A)$0
B)$5,000,000
C)$10,000,000
D)$15,000,000

Question 17

What will happen to retained earnings when a corporation issues 1,000 shares of $1 par stock for $10 per share?

A)It will increase by $1,000
B)It will increase by $9,000
C)It will decrease by $9,000
D)It will remain unchanged

Question 18

A proxy contest is typically one in which:

A)The Board attempts to gain control from the shareholders
B)Management attempts to gain control from the Directors
C)Outsiders attempt to gain control from management
D)The Board attempts to gain control from the Directors

Question 19

What will be the effect on retained earnings if a firm with 5,000 shares outstanding earns $10 per share and has a 30% plowback ratio? It will increase by:

A)$15,000
B)$30,000
C)$35,000
D)$50,000

Question 20

A stock's par value is represented by:

A)The maturity value of the stock
B)The price at which each share is recorded
C)The price at which an investor could sell the stock
D)The price received by the firm when the stock was issued

Question 21

Which of the following is the holder of a warrant allowed to do prior to a specified date?

A)Convert debt into a specified number of shares
B)Sell common shares at a predetermined price
C)Exchange stock for bonds at a specified price
D)Purchase shares at a predetermined price

Question 22

All of the following are true of retained earnings except:

A)It is the difference between paid in capital and the total dividends paid
B)It represents the amount of new capital shareholders indirectly contribute
C)It is equal to one minus the payout ratio
D)It is the amount of earnings plowed back into the firm

Question 23

Bonds that have been sold only to a limited number of institutional investors are considered:

A)Secured bonds
B)Convertible bonds
C)Private placements
D)Indexed bonds

Question 24

Protective covenants prevent bond issuers from irresponsible over-borrowing behavior and are offered for the benefit of:

A)Common shareholders
B)Preferred shareholders
C)Bondholders
D)Both common and preferred shareholders

Question 25

Which of the following are bonds whose coupon rate is tied to a price index?

A)Pay-in-kind bonds
B)Indexed bonds
C)Reverse floaters
D)Asset-backed bonds

Question 26

What happens in the case of a bond selling for $1,000 which can be converted to 20 shares of stock that are currently selling for $55 per share?

A)All the bondholders will choose to convert
B)The stock will go down to $50 per share
C)The bond's price will go down to $900
D)Some of the bondholders will choose to convert

Question 27

Which of the following is true regarding convertible securities:

A)A convertible bondholder is forced to convert at a specific time
B)The convertible option on a bond gives the owner the right to buy shares from a company at a set price
C)The owner of a warrant option will benefit if the firm's stock does poorly
D)The owner of a warrant option will benefit if the firm's stock does well

Question 28

To state that net equity issues have been negative recently in the North America indicates that:

A)More shares have been repurchased than newly issued
B)New shares have been sold at less than par value
C)Issuing stock has been a negative NPV transaction
D)Dividend payments have exceeded net income

Question 29

Which of the following balance-sheet accounts will be affected when the company buys back some of its outstanding shares?

A)Retained earnings
B)Additional paid-in capital
C)Treasury shares at cost
D)All of the above

Question 30

A corporation with long-term fixed-rate debt might prefer floating-rate debt if they thought that:

A)Interest rates would be declining
B)Interest rates would be increasing
C)Their bond rating might be lowered
D)Their bonds were going to be converted into equity

Question 31

What is the net value of common equity for a firm with 3 million shares issued, 1 million shares outstanding, $4 million of retained earnings, $2 million of treasury stock at cost, $1 million in additional paid-in capital, and a $1 par value per share?

A)$4 million
B)$6 million
C)$8 million
D)$10 million

Question 32

What will likely happen in the case of a bond selling for $1,000 which can be converted to 20 shares of stock that are currently selling for $55 per share?

A)The bondholder will lose $100
B)The stock will go down to $50 per share
C)The bond's price will go down to $900
D)The bondholder will choose to convert

Question 33

Ray's Jams Inc.was just established with an investment of $5 million into stereo equipment.Ray expects his company to generate $800,000 a year for the next 200 years.If Ray's cost of capital is 15%, find the market value and book value of his company.

A)Market value=$9.0 million; book value=$5.0 million
B)Market value=$5.0 million; book value=$5.3 million
C)Market value=$5.33 million; book value=$5.0 million
D)Market value=$7.0 million; book value=$5.0 million Book Value = $5 million
Market Value = $800,000(200 year annuity factor)
= 800,000/15%

Question 34

A reverse floater is riskier than a regular bond because:

A)When interest rates rise, the price of a regular bond drops by more
B)When interest rates fall, the price of a regular bond drops by less
C)When interest rates rise, the price of the reverse floater drops by more
D)When interest rates fall, the price of the reverse floater drops by more

Question 35

Book value is a (an) ________ measure, while market value is a (an) ________ measure.

A)Inward-looking; outward-looking
B)More accurate; less accurate
C)Forward-looking; backward-looking
D)Backward-looking; forward-looking

Question 36

Protective covenants are offered for the benefit of:

A)Common shareholders
B)Preferred shareholders
C)Bondholders
D)Both common and preferred shareholders

Question 37

Jay's Jams Inc.was just established with an investment of $5 million into stereo equipment.Jay expects his company to generate $800,000 a year for the next 10 years, followed by $1 million a year for the following 10 years.If Jay's cost of capital is 15%, find the market value and book value of his company.

A)Market value=$9.0 million; book value=$5.0 million
B)Market value=$5.0 million; book value=$5.3 million
C)Market value=$5.3 million; book value=$5.0 million
D)Market value=$7.0 million; book value=$5.0 million Book Value = $5 million
Market Value = $800,000(10 year annuity factor)
+ PV of $1mill (10 year annuity factor)
= 800,000(5.02) + PV of 1 mill (5.02)
= 4,016,000 + 5,020,000/4.05

Question 38

When new shares are sold at a price greater than par value, the excess over par is recorded as:

A)Capital surplus
B)Retained earnings
C)Treasury stock
D)Authorized capital

Question 39

Eurobonds are long-term, corporate liabilities that:

A)Are issued by European firms
B)Are held outside the U.S
C)Are marketed in all countries
D)Are repaid in U.S.dollars

Question 40

Which of the following balance-sheet accounts will not be affected when there is a reduction in the number of outstanding shares?

A)Retained earnings
B)Additional paid-in capital
C)Common shares (at par value)
D)Treasury stock at cost

Question 41

Secured debt is debt that:

A)Carries a fixed interest rate
B)Is held by a trustee until repayment
C)Has more than one year until maturity
D)Has specific collateral backing it

Question 42

Which of the following statements is correct about a corporation that borrows from its bank at "Prime plus one %?" The interest rate:

A)Is set at a level of the prime rate at initiation of the loan, plus one %
B)Can fluctuate up to 1 % upwards over the life of the loan
C)Can be changed upwards but not downwards over the life of the loan
D)Can be changed upwards or downwards in accordance with prime rate changes over the life of the loan

Question 43

Which of the following statements is typically correct for a going-concern firm?

A)Book value of equity exceeds market value of equity
B)Market value of equity exceeds book value of equity
C)Book value of equity equals market value of equity
D)No typical relationship exists between book and market values of equity

Question 44

Which of the following statements is correct for a firm with 100,000 outstanding shares and earnings per share of $6 if retained earnings were just adjusted downward by $50,000?

A)A $5.50 dividend per share was paid
B)A $6.50 dividend per share was paid
C)Net earnings equal $650,000
D)Total dividends paid equal $50,000 retained earnings = net income less dividends
($50,000) = ($6 x 100,000) less dividends
$450,000 = dividends

Question 45

A company's board of directors is primarily an agent of the company's:

A)Management
B)Employees
C)Shareholders
D)Management and employees

Question 46

Which of the following statements is correct about a U.S.corporation in the 35 % tax bracket that can invest either in a bond paying 8 % interest or in the preferred stock of another corporation that pays a 6 % dividend?

A)The stock is preferred by approximately .17 %
B)The stock is preferred by approximately .80 %
C)The bond is preferred by approximately 1.30 %
D)The after-tax yields are identical on each After-tax yield (bond) = 8 %(1 - tax rate)
= 8% (1 - .35)
= 8% x .65
= 5)2%
After-tax yield (stock) = 6% - (6% x taxable portion x tax rate)
= 6% - (6% x .3 x .35)
= 5)37%

Question 47

A warrant has an exercise price of $40, and the current stock price is $38.An investor holding this option will purchase the stock only if:

A)The dividend yield on the stock exceeds 10 %
B)The stock price falls below $38
C)The stock price rises above $40
D)The stock price falls to $20 or below

Question 48

One way in which control of a corporation can be removed from the current board of directors is to:

A)Take away the directors' stock
B)Give voting power to management
C)Remove the board's voting power
D)Fight a proxy contest

Question 49

One common reason for issuing two distinct classes of common stock is to:

A)Sell different classes to increase profits
B)Allow one stock to increase in price while the other class declines
C)Restrict voting privileges from some shareholders
D)Conserve cash by offering dividends to only one class of stockholders

Question 50

The system of electing a board of directors where each director is voted on separately is known as:

A)Majority voting
B)Supermajority voting
C)Cumulative voting
D)Proxy voting

Question 51

Which of the following statements is correct concerning stock dividends?

A)Common stock dividends cannot be paid if preferred stock dividends are in arrears
B)Preferred stock dividends cannot be paid if common stock dividends are in arrears
C)Neither common nor preferred dividends can be paid if accrued interest is in arrears
D)No stock dividends can be paid if the firm has no cash

Question 52

Corporations that annually retire a set portion of their long-term debt are said to be using:

A)Indexed bonds
B)Sinking funds
C)Convertible debt
D)Secured debt

Question 53

What is the after-tax cost to a corporation in the 35 % tax bracket of paying $50,000 in preferred-stock dividends?

A)$17,500
B)$32,500
C)$50,000
D)$76,923 After-tax cost of preferred stock dividends:
= before-tax cost
= $50,000

Question 54

A shareholder owning 100 shares of stock is voting for the board of directors who are elected by cumulative voting.How many votes did the shareholder cast for Director 'A' if four directors are to be elected and the maximum number of votes was cast for 'A'?

A)25
B)100
C)200
D)400

Question 55

The value of retained earnings on the corporate balance sheet represents the amount of earnings:

A)Not paid out in dividends this period
B)That remains in cash
C)Over and above corporate income taxes
D)Reinvested in the firm since its inception

Question 56

Junk bonds represent debt that was issued to:

A)Finance the acquisition of used manufacturing equipment
B)Firms in countries with high rates of inflation
C)Offer higher yields and less security than other debt
D)Firms that have defaulted on their dividend payments

Question 57

Which of the following bonds is likely to be viewed by investors as the most risky?

A)Subordinated debt
B)Indexed bond
C)Secured bond
D)Asset-backed bonds

Question 58

What is the rationale for saying that the federal government provides a tax subsidy to corporate debtors?

A)Interest and principal payments are tax deductible
B)Interest payments are tax deductible
C)Principal payments are tax deductible
D)70 % of interest payments are tax deductible

Question 59

If a corporation has more shares issued than outstanding, then:

A)The board of directors is holding shares
B)There are preferred shares outstanding
C)The corporation has treasury stock
D)Unexercised stock warrants exist

Question 60

An investor who purchases a reverse floater is betting that interest rates will:

A)Increase
B)Decrease
C)Remain constant
D)Move in the opposite direction of the coupon rate

Question 61

All of the following are types of innovative bonds except:

A)Convertible bonds
B)Bowie bonds
C)Reverse floaters
D)Indexed bonds

Question 62

Earnings this year for Plasti-tech Inc.were $200,000, of which $60,000 it decided to plow back and 10 % was depreciation.Plasti-tech's internally generated funds are:

A)$40,000
B)$60,000
C)$80,000
D)$140,000 Internally generated funds:
= (0.10)(200,000) + 60,000

Question 63

When securities are sold directly to a small group of investors is termed:

A)General issue
B)Floating issue
C)Public issue
D)Private placement

Question 64

An issue of bonds that is sold simultaneously in several countries is called:

A)Funded
B)Eurobond
C)Subordinated
D)Sinking fund

Question 65

When a firm issues 50,000 shares with a par value of $5 for $22 per share, additional paid in capital will:

A)Decrease by $250,000
B)Increase by $250,000
C)Increase by $850,000
D)Increase by $1,100,000

Question 66

If the Beta company issues $100 million worth of preferred stock, what will happen to its net worth if book value of common equity is $500 million?

A)It will increase by $400 million
B)It will decrease by $100 million
C)It will increase to $600 million
D)It will decrease to $400 million

Question 67

Giving an investor the right to buy shares in the issuing company at a predetermined rate is termed:

A)Option
B)Warrant
C)Private placement
D)Consideration

Question 68

One way that investors contribute capital to the firm is by:

A)Plowing back money into retained earnings
B)Paying less than par value for the stock
C)Receiving dividends and reinvesting them on their own
D)Increasing the amount of treasury stock

Question 69

Of the G-7 country firms' average total-debt-to-equity ratios, Canada's and the U.S.'s are:

A)The highest
B)The lowest
C)About average
D)Not calculated at all

Question 70

A firm's internally generated funds are calculated by:

A)Subtracting depreciation from net income
B)Adding depreciation to net income
C)Adding dividends to net income
D)Subtracting dividends from net income plus depreciation

Question 71

With respect to bonds, when interest rates increase:

A)The coupon rate also increases
B)The coupon rate remains unchanged
C)The price of the bond rises
D)The price of the bond remains unchanged

Question 72

When a stock price rises to its par value, it will then be repurchased by the corporation.

Question 73

For Canadian non-financial firms, what source of capital is used the least?

A)Debt issues
B)Internal funds
C)Net equity issues
D)Bond issues

Question 74

The majority of an established firm's capital is generated:

A)Internally
B)Externally
C)Through issuance of new shares
D)Through funded debt

Question 75

If 100 million shares of common stock are issued with a par value of $2 and additional paid in capital of $800 million, the total par value of the issued shares is:

A)$200 million
B)$600 million
C)$800 million
D)$1 billion

Question 76

Canadian non-financial firms' average value of debt-to-equity ratios:

A)Have fallen slightly over the past 10 years
B)Have risen substantially over the past 10 years
C)Have risen slightly over the past 10 years
D)Have fallen substantially over the past 10 years

Question 77

Preferred stockholders:

A)Have full voting rights
B)Receive a fixed dividend
C)Have priority over debt holders if the company goes out of business
D)All of the above

Question 78

A company is about to issue new shares of stock.If the par value per share is $4.00, the price of the new shares will most likely be:

A)Less than $4.00
B)Equal to $4.00
C)Greater than $4.00
D)Equal to the capital surplus

Question 79

The benchmark interest rate that banks charge to their best customers is termed:

A)Floating rate
B)Convertible
C)Private placement
D)Lease

Question 80

Market value is usually greater than book value because:

A)Inflation drives market value above original costs
B)Inflation drives book value below original costs
C)Firms tend to invest in projects with very high book values
D)The cost of capital drives market value up